As intimated by the Chancellor of the Exchequer during the election campaign, in response to concerns about the difficulty of assessing the tax status of contractors, the Government has launched a review into the implementation of anticipated changes to the off-payroll working rules (IR35 Rules). These changes, as currently proposed, will extend the rules to medium and large sized businesses in the private sector and require those private businesses to determine whether or not a contractor is self-employed or an employee for UK tax purposes. For an outline of the proposed changes, please see our earlier article here.
The review is expected to conclude by mid-February. However, as the review is focused on how the private sector rules will be implemented (and making this as smooth as possible), and there is no indication that the targeted implementation date will be delayed, it seems likely that the 6 April 2020 implementation date remains unchanged. Consequently, those affected should continue their preparations in the meantime.
Aim of the review – the next step to ensuring smooth implementation of the reforms
The review is not a full public consultation but rather will gather information from public sector bodies of their experiences with implementation (who have been required to deal with the rules since April 2017), and from potentially affected individuals and businesses with concerns. The government plans to simultaneously continue to conduct additional education and support activities to prepare those affected.
Whilst the review will also assess whether any additional support is needed to ensure that the self-employed who are not within the scope of the off-payroll working rules are not affected, it appears that the Government intends to also launch a separate review to explore how it can better support the self-employed. No indication has been given as to when this separate review may be launched.
The review that just launched is expected to conclude by mid-February 2020 and importantly, there is no suggestion that the 6 April 2020 implementation date will be delayed. This means there will just be a few weeks to put into place any changes or measures arising out of the review, albeit it is expected that any amendments arising from the review will be tweaks rather than substantive in nature.
Is the updated CEST tool any more reliable?
The review will also look at the recently updated HMRC check employment status tool "CEST".
One of the major concerns following the announcement of the extension of the rules to private businesses was that CEST did not give a result either way in 15% of cases, or gave results that did not align with decisions by the tax tribunal in similar circumstances. Whilst CEST was updated on 25 November 2019, by adding additional questions and testing results against tribunal decisions, and should now give a definitive result one way or another, some questions remain.
In particular, there has been criticism that the tool remains overly reliant on the right to substitution to determine a result, and that there are no questions that relate to mutuality of obligation, which remains a key feature when determining employment status.
Therefore, whilst the updated version of CEST is helpful, and the review may result in further amendments to the tool, additional advice and analysis may still be needed to determine the correct status in difficult cases.
Is a blanket approach safest?
Another issue the review may focus on is the blanket approach that appears to have been taken by a number of larger businesses who are requiring all self-employed contractors to move onto PAYE contracts. This blanket approach would seem to be at odds with the requirement under the legislation that the end user take reasonable care in evaluating the tax status when preparing the status determination statement for each contractor it uses. Furthermore, this is likely to inconvenience and reduce the sums paid to the genuinely self-employed who are not intended to be affected by the changes.
So, although a blanket approach may well seem safest for businesses, characterising the true relationship could result in a lesser tax and compliance burden.
International application – still no material guidance available
Unfortunately, there is still no guidance on the international application of these rules, which would be useful given that the legislation is silent in this regard and one or more parties in the supply chain can be based overseas. Whether or not this will be picked up by the review is yet to be seen. Consequently, the self-employed, agencies and end users are still left to work this out for themselves.
Although the review may give rise to some amendments to the new rules, these are likely to be tweaks rather than substantive in nature, and it appears that the current proposals are still due to come into effect from 6 April 2020. Therefore, we would recommend that any private businesses that will be within the scope of the new rules continue (or start as soon as possible, if not already underway) their preparations in respect of the revised IR35 rules. Those affected, could otherwise be faced with potential HMRC scrutiny, additional taxation and potential penalties.
If you need any assistance with determining whether you are caught by these rules and/or the tax status of any contractors that you currently engage, or will be looking to engage, please speak to your usual contact at Withers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.